Apple Opportunity #1- An OS Inflection Point?

Apple is expected to sell over 4 million 3G iPhones by the end of the September quarter. Roughly 4x the totals from a similar post-launch period for the first iPhone.

The iPhone App Store saw over 60 million downloads in its first month of existence.

These numbers are all very impressive but the naysayer will hold true and naysay. The numbers are still vary small in the grand scheme of things. Yes, OSX market share is approaching 8% but don’t forget that Windows is still at 90%. Yes, Apple sold 4 million iPhones, but the number in insignificant when taken against the 1.15 billion mobile phones sold in 2007.

The naysayers certainly have a point but what I believe that they miss or discount is the strategic positioning of both the OSX and the iPhone OS products and the potential for mammoth inflection points in both the fixed and mobile computing space. Andy Grove of Intel, who first highlighted the concept of a business inflection point in his book “Only The Paranoid Survive” defines an inflection point as “a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end.” He also discusses how markets may not notice inflection points until well after the market has passed over the inflection point. “They build up force so insidiously that you may have a hard time even putting a finger on what has changed, yet you know that something has.”

The fixed, referring to laptops and desktops, computing OS market feels to be potentially approaching an inflection point. Microsoft has owned this market through the network effect benefits that converged and locked the market into a de facto Windows OS standard. De facto standard locks are born out of positive feedback loops. More Window’s OS licenses on desktops drives more applications developed for the OS, drives an increase in the utility/functionality of the OS’s desktop, drives and increase in the number of OS licenses. The positive loop can create a dominant market position out of a fragmented market. Rarely is a de facto standard overcome other than through a complete change of the playing field/rules of the business. At this moment in time however, it feels like there is a change in the wind. The stumble and general lack of interest in Vista, the ability to run Windows programs on Macs, and the mass market Apple brand halo effect from iPods are all leading to an increasing number of OSX converts in both the consumer and enterprise space.

Apple has at least 3-5 years until Microsoft brings out a Vista successor to grow mainstream acceptance of OSX. I believe that if they are able to get over 15% or so market share and show accelerating market share gains, then the Window de facto monopoly is over. The positive feedback lock will be broken and the market will be wide open for either the Windows successor or OSX. Given that OSX gained two percent market share over the last year and appears to be gaining mainstream credibility, it is entirely possible that it can achieve 15% over 3-5 years.

Apple is rumoured to be introducing successors to the Macbook and Macbook Pro in September. Also rumoured, and fueled by their CFO’s projection of increasing revenue and decreasing margin, is a sub $1,000 Macbook to compete in the territory that is still generally completely owned by Windows based machines – the high volume low end/entry level laptops. Watch for it. If they do come out with a sub $1,000 Macbook then they’ve made their intentions clear – they see the inflection point opportunity and are going after market share hard while Microsoft’s on the mat with Vista.